The Small Business Optimism Index marked its second highest level in the survey’s 45-year history at 107.9, rising to within 0.1 point of the July 1983 record-high of 108. The July 2018 report also set new records in terms of owners reporting job creation plans and those with job openings. A seasonally-adjusted net 23 percent are planning to create new jobs, up three points from June. Thirty-seven percent of all owners reported job openings they could not fill in the current period, a one-point increase from June.

“Small business owners are leading this economy and expressing optimism rivaling the highest levels in history,” said NFIB President and CEO Juanita Duggan. “Expansion continues to be a priority for small businesses who show no signs of slowing as they anticipate more sales and better business conditions.”

A net eight percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months. July is the eighth consecutive strong month of reported sales gains after years of low or negative numbers. A net 35 percent of owners expect better business conditions, ticking up two points from June.

Additional July highlights include:
- The percent of owners citing the availability of qualified workers as their number one business problem landed one point below the record high.
- Reports of compensation increases remained strong.
- Capital spending maintained a respectable pace but did not display the exuberance of its fellow indicators, although spending plans did post a gain.
- Plans to add to inventory holdings were strong as strong sales continue to deplete stocks.
- Profits continued to perform, and more firms raised prices, something that is easier when demand is strong.

“Small business owners have never been so optimistic for so long, helping to power the second longest expansion in history,” said NFIB Chief Economist Bill Dunkelberg. “Despite challenges in finding qualified workers to fill a record number of job openings, they’re taking advantage of this economy and pursuing growth.”

Fifty-nine percent reported hiring or trying to hire (down four points), but 52 percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-three percent of owners cited the difficulty of finding qualified workers as their single most important business problem (up two points), one point below the 45-year record high.

LABOR MARKETS
Small business owners added the largest number of workers per firm since 2006 in July, adding a net 0.37 workers per firm on average, almost double June’s rate. Seventeen percent (up 2 points) reported increasing employment an average of 4.7 workers per firm, and 11 percent (down 1 point) reported reducing employment an average of 2.0 workers per firm (seasonally adjusted). Fifty-nine percent reported hiring or trying to hire (down 4 points), but 52 percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-three percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 2 points), 1 point below the 45 year record high. Thirty-seven percent of all owners reported job openings they could not fill in the current period, a new survey record high. Thirteen percent reported using temporary workers, up 1 point. Reports of job openings were most frequent in construction (57 percent) where labor shortages are clearly restricting the construction of new homes and apartments, 46 percent in manufacturing, and 45 percent in the wholesale trades. A seasonally-adjusted net 23 percent plan to create new jobs, up 3 points from June and very strong. Firms in construction and manufacturing, sectors where wages are above average, account for the real strength in hiring plans. Labor markets are very tight, for both skilled and unskilled workers. Thirty-three percent have openings for skilled workers, and 15 percent have openings for unskilled labor, both 2 points higher than in June.

SALES AND INVENTORIES
A net 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, down 2 points but a very good number. July is the eighth consecutive strong month of reported sales gains after years of low or negative numbers. Over 40 percent of the owners in construction and manufacturing reported sales volume gains. The net percent of owners expecting higher real sales volumes rose 3 points to a net 29 percent of owners, a strong reading.

The net percent of owners reporting inventory increases rose 6 points to a net 4 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” (a positive number means more think stocks are too low than too high, a positive for inventory building) fell 3 points to a net negative 3 percent, historically a “lean” reading (although not as “lean” as June’s reading of 0). The net percent of owners planning to build inventories fell 2 points to a net 4 percent, the thirteenth positive reading in the past 21 months.

CAPITAL SPENDING
Fifty-eight percent reported capital outlays, down 1 point from June, but solid. Of those making expenditures, 42 percent reported spending on new equipment (down 2 points), 25 percent acquired vehicles (down 1 point), and 16 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (up 1 point), and 13 percent spent money for new fixtures and furniture (up 1 point). Solid investment spending is necessary to produce the improvements in productivity that will secure future increases in real wages and continued growth in output. Thirty percent plan capital outlays in the next few months, up 1 point from June. Plans were most frequent in manufacturing, where additional capacity and productivity-enhancing investments are needed.

INFLATION
The net percent of owners raising average selling prices rose 2 points to a net 16 percent seasonally adjusted. Seasonally adjusted, a net 24 percent plan price hikes (unchanged). With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices. Shortages also create opportunities to raise prices as in the housing market. Forty-one percent of construction firms report raising average selling prices, substantially more than in any other industry group.

COMPENSATION AND EARNINGS
Reports of higher worker compensation gained a point from June to a net 32 percent of all firms, 3 points below May’s record reading of 35 percent. Plans to raise compensation rose 1 point to a net 22 percent, historically strong. Government measures of wage and compensation gains follow movements in NFIB plans to raise compensation but with a 3 quarter lag, so government reports of rising compensation will increase even more in the second half of the year. Owners complain at record rates about labor quality issues, with 88 percent of those hiring or trying to hire in June reporting few or no qualified applicants for their open positions. The frequency of reports of positive profit trends was unchanged at a net negative 1 percent, one of the very best readings in the survey’s 45 year history.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and just 1 point above the record low. Thirty-two percent reported all credit needs met (up 2 points), and 50 percent said they were not interested in a loan, down 4 points. Two percent reported that financing was their top business problem (unchanged) compared to 17 percent citing taxes, 14 percent citing regulations and red tape, and 23 percent the availability of qualified labor. Four percent (up 2 points) reported loans “harder to get”, historically very low. Thirty-two percent of all owners reported borrowing on a regular basis (up 4 points). The average rate paid on short maturity loans rose to 6.3 percent (up 20 basis points).

COMMENTARY
Although some panned any celebration of the 4.1 percent second quarter GDP growth, small business owners beg to disagree. At least in the small business sector of the economy, Main Street’s performance over the last 21 months is unprecedented based on reports for the past 45 years by hundreds of thousands of NFIB’s member firms. Owners have never been so optimistic for so long. This has translated to improved employment and investment spending that buoys GDP growth, even at the end of what will be the longest expansion in modern history.

Consumer sentiment is at record high levels. Consumer spending, which accounts for 70 percent of our economy, posted 4 percent growth in Q2. Historically revised data show that consumers have been saving much more than thought, and income gains in recent months have been solid, providing support for spending in the second half. The record levels of firms reporting higher compensation is a clear indication that wages will be rising further in the second half.

The Federal Reserve is on track for a rate hike in September and in December, adding half a percent to the rate on all variable rate loans. The 10-year Treasury bond is at 3 percent. Two rate hikes and prospects for more in 2019 will take that rate to 3.5 percent. This is the rate that most small business loans are priced from. However, with strong sales, lower taxes and lower regulatory costs, and the ability to raise prices, the expected return on real capital investments in plant and equipment will remain favorable, overwhelming the negative effects of higher rates.

Now the second longest expansion in history, Main Street is set to push this expansion to a new record by adding a super-charged era of growth on to the sluggish one from 2009 to 2016.